USD Struggles on Soft Reports by Korman Tam

The beleaguered dollar found no reprieve in today’s US economic reports, with GDP and new home sales falling short of consensus estimates, sending the currency to another record low against the euro at 1.4188. Concerns of deteriorating conditions in the US economy continue to plague the greenback, raising expectations that the Fed will cut interest rates again by at least 25-basis points this year.

The final reading for Q2 GDP growth was weaker than initially anticipated, falling to 3.8% versus calls for a decline to 3.9% from 4.0% in the preliminary reading. However, PCE prices, the Fed’s preferred gauge on inflation, crept up higher than expected, with the headline at 4.3% from 4.2% while the core PCE reading rose to 1.4% versus 1.3%. The housing market continues to deteriorate, with more evidence revealing slowing activity as new home sales plunged by 8.3% to 795,000 units in August. Meanwhile, weekly jobless claims improved to 298,000, down from the previous week at 311,000.

The week concludes with a series of key US releases on Friday morning, consisting of August PCE, personal consumption, personal income, September Chicago PMI, and the University of Michigan consumer sentiment survey. Manufacturing is seen struggling, with the Chicago PMI expected to decline to 53.3 from 53.8. The University of Michigan consumer sentiment survey is forecasted to improve slightly to 99.0, up from the preliminary reading at 98.4. However, given this week’s surprise drop in the Conference Board’s consumer confidence survey to 2-year lows, it will be interesting to see if the University of Michigan survey is resilient to the recent financial market turmoil and can shrug off burgeoning fears of recession.
Euro Buoyed

The euro continued to forge ahead against the dollar and yen amid a combination of robust Eurozone economic data and renewed signs of a faltering US economy. The single currency jumped to a fresh all-time high versus the greenback just shy of the psychologically key 1.42-level at 1.4188.

Germany’s labor report improved better than anticipated with the unemployment rate for September unexpectedly falling to its lowest level in 14-years at 8.8%. Meanwhile, unemployment change in September declined by 50k to 3.694 million. The robust data adds further support for at least another 25-basis point rate hike by the ECB before year-end.

JPY Slumps Ahead of Data

A barrage of Japanese economic data is due out this evening and will provide further clues as to if and when the BoJ may raise rates again. Our view is for the Bank to remain on hold until Q1 2008. The reports slated for release include the August labor report, retail sales, manufacturing PMI, CPI, housing spending, industrial production, and housing starts. With exceptions in household spending and industrial production, the reports are largely unchanged from the prior readings. However, industrial production is estimated to post a strong gain, improving by 3.2% in August versus a 0.4% decline in the previous month. Household spending is forecasted to gain by 1.2% compared with a 0.1% decline in the prior month.